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    I have read through FAR 32. 503-9 and on past that quite a bit looking for actual FAR guidance and can't really find any that specifically says when you SHOULD or SHOULD NOT use an ALR. In the DAU Whitepaper "Liquidating Progress Payments Based on Costs" on page 6 there is a quote that references FAR 32.503-12(b) that says "the PCO should not agree to lower the liquidation rate if the progress or the quality of contract performance is unsatisfactory". If you look in the FAR it is hard to interpret FAR 32.503-12(b) that way and if you could give any explanation as to why is was interpreted that way it would be a huge help. Basically we are looking for something that says exactly that but we are not interpreting 12(b) in the same way at all. We need some type of regulations though that specifically refers to the poor quality of performance as being a reason to not use ALR.


    Answer

    1. The FAR references quoted below in pertinent part are applicable to this response.

    FAR 2.101 -- Definitions
    “May” denotes the permissive.

    FAR 32.503-9 -- Liquidation Rates -- Alternate Method
    (a) … The objective of the alternate liquidation rate method is to permit the contractor to retain the earned profit element of the contract prices for completed items in the liquidation process. The contracting officer may reduce the liquidation rate if --  [Subparagraphs (1) through (9) list the required conditions, none of which are directly pertinent to this response.]

    FAR 52.232-16 -- Progress Payments
    (a) Computation of amounts.
      (1) … [T]he Government will compute each progress payment as 80 percent of the Contractor’s total costs incurred under this contract whether or not actually paid.

    (b) Liquidation.  … [A]ll progress payments shall be liquidated by deducting from any payment under this contract … the unliquidated progress payments, or 80 percent of the amount invoiced, whichever is less. … The Government reserves the right to unilaterally change from the ordinary liquidation rate to an alternate rate when deemed appropriate for proper contract financing.

    2. The following references are also applicable to this response.

    A. DAU White Paper: Liquidating “Progress Payments Based on Costs” using the Alternate Liquidation Rate Method, dated 10/05/2010. [Mentioned in this inquiry]
    https://www.dau.mil/acquipedia/Lists/Acquipedia%20Article/Attachments/17681/DAU%20Whitepaper_Liquidating%20Progress%20Payments%20Based%20on%20Costs.pdf

    B. DPAP Webinar presentation: Understanding Profit, Cash Flow, and Internal Rates of Return 
    http://www.acq.osd.mil/dpap/cpic/cp/docs/Cash_Flow_and_Profit_V3.pptx

    3. As specified in contract clause FAR 52.232-16, the progress payment rate specified in paragraph (a) and the liquidation rate specified in paragraph (b) of this clause are set equal to each other at contract award which results in the ordinary liquidation method. As stated in FAR 32.503-9(a), the objective of a lower alternate liquidation rate is to permit the contractor to retain the earned profit element of the contract prices for completed items in the liquidation process. As explained in the DAU white paper referenced above, this alternate liquidation method results in greater cash flow to the contractor. As shown in the reference (b) DPAP presentation on Slide 32, additional cash flow increases the Internal Rate of Return (IRR) earned by a firm on any contract which makes that contract more profitable.

    4. As stated in FAR 32.503-9(a), the contracting officer may reduce the liquidation rate if certain conditions apply. FAR 2.101 defines “may” as denoting the permissive (i.e., allowed but not obligatory). Additionally, clause FAR 52.232-16(b) states that the Government reserves the unilateral right to modify the contract from the ordinary liquidation rate to a lower alternate liquidation rate when deemed appropriate. Based on these regulatory citations, the use of the alternate liquidation rate is completely discretionary on the part of the contracting officer depending upon the circumstances. Consequently in our opinion, these citations alone would justify the contracting officer’s denial of the current request to modify the contract to implement an alternate liquidation rate in this case because such action would be tantamount to rewarding apparently poor contract performance with greater interim cash flow being paid by the Government and thereby resulting in an otherwise more profitable contract.

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